California’s Cap-and-Trade Program Creating Carbon Market

California has kicked off its cap-and-trade program to reduce carbon dioxide emissions. The system is now in play, increasing speculation as to whether it will nose-dive or become a national model.

The California Air Resources Board says that carbon credits were sold at auction for slightly more than the $10 opening. That has enabled the state to raise $233 million in round one -- money to be allocated to customers who are expected to pay higher electricity prices, all resulting from a shift away from fossil fuels and toward cleaner fuels. The major point, say the plan’s architects, is that first auction has drawn lots of participants and that the process will become more vibrant.

“By putting a price on carbon, we know we are beginning the process of breaking our dependence on fossil fuels,” says Mary Nichols, chair of the resources board, in a San Jose Mercury News story. She says that the state also expects to see new economic development.

The latest move by California is part of an earlier law passed there in 2006, called AB 32. That law now requires the state’s utilities to provide a third of their fuel offerings in the form of green energy by 2020.

About 350 companies, and around 600 facilities, are impacted by the cap-and-trade provisions. To keep business costs down, 90 percent of the tradable credits will be free for two years. By 2016, all such allowances will be sold. And by 2020, carbon emissions are supposed to be at 1990 levels.

In a cap-and-trade system, government sets pollution limits and then credits are either auctioned or allocated to industry. Those companies that are able to exceed the expectations can either bank their allowances for future use or sell them to other businesses that are unable to meet their obligations. As the ceilings come down, overall emissions then fall.

Many California businesses have argued that forcing reductions in carbon emissions through a cap-and-trade platform will cause industry to move out-of-state. In fact, just prior to the auction, the California Chamber of Commerce filed suit to prevent subsequent auctions. It is arguing that the trading scheme is nothing more than a tax established on the state’s businesses by unelected officials.

“What was not authorized by AB 32 is the Board’s decision to withhold for itself a percentage of the annual statewide greenhouse gas (GHG) emissions allowances and to auction them off to the highest bidders, thus raising from taxpayers up to $70 billion or more of revenue for the state to use,” according to the complaint.

Work-in-Progress

But the California Air Resources Board voted unanimously in October 2011 to enact such a program that is expected to cover 85 percent of the state’s emission sources, reasoning that it would be healthier for both the economy and the environment. The November 14th auction was able to sell all of the credits it offered. Each credit allows for the release of one ton of carbon.

The theory is that businesses may initially find it cheaper to purchase credits as opposed to invest in new pollution controls. But as the pollution caps become tighter and as the price of carbon rises, they would then buy more efficient equipment. New business lines would then sprout up while the environment would become cleaner.

“The auction itself was designed to be done on a confidential basis,” says Chairwoman Nichols, as reported by the San Jose Mercury News. “These are private decisions that businesses are making -- whether they will reduce emissions or purchase allowances.”

The same news story goes on to quote Rob Day of Black Coral Capital in Boston, which is a venture capital firm. He says that the facts speak for themselves -- that all of the credits were sold during the auction’s debut. The opening price of the carbon allowances is less important, he adds, although it will “change” over time. The bottom line: The state is pricing carbon and a market is forming around it, meaning that the relevant companies will have to focus on their carbon footprints.

The thinking varies as to what the economic impact would be of a national carbon cap-and-trade system. Gross domestic product would initially take a hit, says the Pew Center on Climate Change. But as the United States would move increasingly toward a carbon-constrained environment, the next-generation economy would take off.

Considering the stakes, California’s early attempts at establishing a cap-and-trade mechanism went off without a hitch and in the eyes of regulators, it was a success. But the state’s quest is a work-in-progress that will need to win-over apprehensive businesses if it is to be replicated around the country.

EnergyBiz Insider has been awarded the Gold for Original Web Commentary presented by the American Society of Business Press Editors. The column is also the Winner of the 2011 Online Column category awarded by Media Industry News, MIN. Ken Silverstein has been honored as one of MIN’s Most Intriguing People in Media.

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